(The following statement was released by the rating agency)
Nov 28 - Fitch expects 2012 holiday retail sales to grow between 3% and 4%
versus 5.6% in 2011 despite a strong seasonal start. Total spending increased
13% during the Thanksgiving weekend, according to a survey conducted by the
National Retail Federation (NRF). We believe the aftermath of super storm Sandy
could dampen consumer spending somewhat in the Northeast and Mid-Atlantic
states. In addition, sales could experience a modest negative impact as a result
of uncertainty related to the unresolved fiscal cliff issue and the broader
Intense promotional activity will likely be the key driver for consumer traffic
given a continued weak recovery in consumer spending and an ongoing focus on
value. Gasoline prices remain elevated in the high $3 per gallon range
nationally, and real earnings have been flat to down 1% since 2010. Both will
likely hurt discretionary spending, particularly at the lower income household
level. As a result, we believe the bifurcation in consumer spending between high
and low income households will continue.
Gross margins are expected to be flat to slightly down for most retailers.
Promotions this holiday season will be significant in areas such as consumer
electronics and toys, as traditional pure play retailers such as Best Buy and
Toys "R" Us, Inc. (TOYS) try to fend off competition from both discount and
online retailers. Strategies include offering price matches on certain or all
items available in stores. Whether this will ultimately drive increased volume
remains uncertain given the challenge in changing price perception for
Gross margins for apparel-related retailers are likely to improve moderately,
particularly for those hit with high cotton costs last year such as The Gap,
Inc. (Gap), The Gymboree Corporation (Gymboree), Hanesbrands Inc., and Levi
Strauss & Co (Levi). Prudent inventory management will remain a key driver to
realizing normalized gross margins. Underlying improvements from lower product
costs and strong inventory control are likely to be offset by increasing
promotional pressure as retailers invest both in pricing and the online channel
to drive traffic. We believe J.C. Penney and Best Buy will continue to see
significant sales and gross-margin deterioration. In addition, Saks has
moderated its fourth-quarter 2012 comparable store sales expectation to flat
given the significant impact of super storm Sandy on many of its stores.
Therefore, Saks' fourth-quarter EBITDA is expected to be flat year over year,
but liquidity should remain strong.
For more information on this topic, see Fitch's special report, "2013 Outlook:
U.S. Retailing, Grab for Share Intensifies," available at www.fitchratings.com.
(Caryn Trokie, New York Ratings Unit)